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“Aussie, Aussie, Aussie… Up Up Up!”

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Yesterday I posted an article about how the over-valued Aussie dollar is going to keep a lid on rates. I got a few questions on it so I thought I’d flesh it out a bit more.

Let’s start with a picture:

Screen Shot 2013-03-08 at 11.03.01 AM

This comes from a recent HSBC report looking at the state of the global currency market. HSBC ranked all of the global currencies against their assessment of what ‘fair value’ is.

And who’s that all the way over on the right? It is. It’s the little Aussie Battler.

According to HSBC, the Aussie dollar (relative to the US dollar) is the most over-valued currency in the world right now.

They’re not the only ones. The RBA had a freedom of information request sprung on them by Bloomberg. In an internal memo they released, they said they thought the Aussie was anywhere between 4 and 15 percent overvalued.

Using the OECD’s measure of purchasing power parity, the Australian dollar comes in at a massive 60 percent over-valued.

There’s no precise way to measure how under or over-valued a currency is, and economists would probably have different definitions of what ‘fundamental value actually means.

Some people try to model supply and demand. Some try to compare the prices of similar things in each country. The Economist magazine famously publishes The Big Mac index. The idea is that MacDonald’s signature ‘turd in a bun’ is the same wherever you go, and the exchange rate should equalise the difference across countries.

(On the Big Mac measure by the way the Aussie is 12 percent overvalued…)

But while there are any number of opinions about how to calculate fundamental value, there is a clear consensus that the Aussie is overvalued – probably by a decent amount.

So how did we get here and what does it mean?

A lot of it has to do with capital flows.

Partly it’s about mining investment in Australia, which of course has to be done in Aussie dollars.

However, the really interesting story is debt.

Following the GFC, the global economy found itself stuck in a mire. Things had been given a shake and it looked like the whole show could fall to pieces. A string of sovereign debt crises in Europe gave investors the panics, while debt in the US threatened to send the government bankrupt and turn out all the lights.

But in these stormy seas, Australia shone like a rock of stability and fiscal responsibility. Of course when you’ve got 1.3 billion Chinese driving a commodity boom, it’s easy to pretend that you’ve got the smarts with the monies.

And so investors came flooding our way, looking for any port in a storm that could safely look after their money.

Take a look at the figures:

Foreign investors purchased $58 billion worth of Commonwealth government bonds in 2012. That’s a lot!

In 2012 our biggest exports were iron ore at $85 bn, followed by government debt, followed by coal at $48 bn.

Offshore investors couldn’t get enough of Aussie debt, and needed Aussie dollars to buy it. This extra demand drove the Aussie to new heights.

The other issue holding up the Aussie right now is the RBA’s recognised refusal to take part in the global currency war.

We are the Switzerland of currencies.

There’s a lot of concern that countries are out there actively trying to devalue their currencies – to help out their domestic industries. Japan’s come under a lot of fire lately, but I don’t reckon they’re the only ones doing it.

But that HSBC report found that while Australia had the most overvalued currency in the world, our policy makers were also the least active in manipulating the market.

You don’t have to have an economics degree to put that two and two together.

The RBA memo said they reckoned that up to 34 central banks around the world were hoarding Aussie dollars. These 34 banks together control more than US$3 trillion in foreign exchange reserves, so even a small change in their positions could have a big impact on the Aussie.

And the take home message for investors is that these factors don’t look like unwinding anytime soon.

It seems like it would take a miracle to bring the budget into surplus this year, so there’s going to be a solid on-going supply of Aussie debt. And while Europe and the rest of the world looks more stable these days, our economy is still streaks ahead.

Demand for Aussie dollars stays high.

The Aussie dollar will hang on to its safe haven status, and it would be a real change of direction for the RBA to start taking part in the currency wars. My bet would be not on Glenn’s watch.

And my bet is that the foreign central banks won’t be able to keep their fingers out of it.

And all this means that the Aussie will stay high and overvalued.

And as I said the other day, this means that interest rates will stay grounded.

Which as I keep saying, is just going to keep pumping more and more money into assets, particularly property.

And I say, if the Japanese central bank wants to make me rich…

… go ahead and let ‘em.

That’s my point of view and opinions …and I’m sticking to them.

Have a great weekend… down south it’s a 3 day kind…wippy !!

LOOK OUT! The Next Interest-Rate Move is Up!!

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Hey, don't worry I'm not suffering a mild case of schizophrenia here… although it was important to get your attention.

You know my views… I wrote about them last week.

But not every one agrees with me, so I thought we should consider their argument.

…and then I want to add more weight to the my point of view, which I think you will find really valuable.

Here we go…

A few pundits are saying that we could be staring down the barrel of interest rate increases sometime this year – that the next move in interest rates could be up.

HSBC chief economist Paul Bloxham (ever heard this guy talk? Refined tone, very intelligent, super smart and convincing) has gone out on a limb and is telling anyone who'll listen that this easing cycle is over.

He's still a lone voice in that noisy boredom (the collective noun) of economists, but there's a certain logic to his argument.

Rates are at record lows and at what is obviously a very stimulatory level.

Unemployment is steady at a pretty low level (any nation in Europe would be over the moon with 5.4 percent!) Growth seems to be returning to trend as the big international issues that threatened the outlook late last year seem to have sorted themselves out.

America is up and going again (the Dow is at an all time high as I write this), China is back on track and Europe is more funny, but also more stable.

In the old days, it's exactly this change to the outlook that would drive a reversal of rates from levels like these.

But that was the old days.

Bloxham hasn't realised that the game has changed. Radically. Put away your bat and get out your footy boots.

[Read more…]

Big Money is Moving …and you'll be shocked where it's going!

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Las Vegas.

Proof that all that glitters ain’t gold.

Elvis impersonators, flashy lights, pretty girls with costumes made up of more feathers than fabric… it’s got it all.

And every casino in Vegas is crammed to the rafters with suckers looking for an entertaining way to throw all their hard-earned money away.

You roll past the poker, the black-jack, the roulette wheel. But hang on, who’s that over there? It is! It’s Warren Buffet!

What’s he doing in Vegas? You don’t become the world’s third richest man by backing a rigged game – unless you know the game is rigged in your favour.

And who’s that sitting next to him? It’s old boy Larry Fink, the chief of Blackrock – the largest money-management firm in the world. And to his left is John Angelo, from Angelo, Gordon and Co.

Together, these guys control more wealth than many nation states. So what are they doing in Vegas? What game are these guys backing?

Property.

Property?!? What, are they crazy? Everybody knows the US property market is a disaster zone. Sure, there have been some solid signs lately, but property prices nationally are still 30 percent lower than they were at the peak almost 6 years ago, way back in mid 2006.

And a lot of Americans still find themselves deep underwater.

But as you’re scratching your head, you remember the golden rule of investing.

Buy low, sell high.

And that’s exactly what these guys are doing. If you follow the big money in America right now, it will show you that the serious investors believe that the property market has bottomed, and we’re launching into an upswing dynamic.

And if you follow the scale of funds being directed into property, it tells you that these guys believe that a lot of property markets over-corrected in a big way in the downturn. That is, prices fell too far and a lot of high-performing properties are massively undervalued.

Las Vegas is a case in point.

In the run up to the housing peak, Las Vegas and Nevada led the country is housing construction, and it was one of the hottest housing markets in the country.

Then the bubble burst.

Between 2006 and early 2012, house prices in the city of lights fell a staggering 62 percent. It was the biggest fall in any US metropolitan centre, and the real estate market was smashed to pieces.

But while it was clear that prices were over-valued before the crash, prices seem undervalued now. A lot of people got very badly burnt in the crash, and as the saying goes, once burnt, twice shy. This is keeping a lid on demand for what are now, very cheaply priced homes.

And this gap in demand is being filled by Buffett and the boys. They know that the market has overcorrected on the down-side – and there are some awesome bargains to be found.

And so large investment funds have been snapping up land and properties in Las Vegas and other cheap markets across the country. They’ve also been very active in the foreclosed property market, where they’ve been snaffling up some incredible bargains.

They’re not bound by sentimentality and fear, and just see an investment for what it is – the promise of a particular return at a particular price.

And though the eyes of a cold-blooded accountant, investing in US property makes a lot of sense right now.

This is all a classic play for Warren Buffett. He’s not a short-term, get in and out quickly kind of investor. He’s made his fortune by backing major macro trends, and keeping an eye on the big picture. He’s a master at positioning.

And he’s also done it by keeping a level head, and knowing when the market has lost touch with reality. He gets out when things are too hot and people are too excited, and he gets in when people become too pessimistic and the market is undervalued.

He zigs when they zag.

And this is just what he’s doing in property. He’s buying up bargains because people just don’t trust property right now – for no good reason. Just fear.

Fear that the normal cycle in housing is somehow busted. That the good times will never return. Sure it was the mother of all downturns, but in Buffett’s words, “housing will come back – you can be sure of that.”

That’s why Buffet has been aggressively bidding for billions of dollars of distressed loans and underwater properties. He’s also buying up mortgage brokers and their loan portfolios, real-estate vendors, and even brick-making companies.

Brick-making companies.

He’s going all out to take on a massive exposure to the US property market.

And will he be right?

Well, no one knows the future. But I can tell you one thing: no one has made much money betting against Warren Buffett in the past 50 years!

And while it does seem clear that some markets in the US are massively undervalued, there are also some tried and tested recovery dynamics on his side.

In a cyclical market like housing, it all comes down to supply and demand.

On the supply side, the crash knocked out a lot of supply. A lot of real-estate vendors and homebuilders went underwater. This is holding back the markets ability to respond to increasing demand, which therefore gets translated into increasing prices.

Sure, there was probably an over-supply of houses during the peak. But that was six years ago. The market is a lot tighter than what it was.

The other key factor is demand. The US economy is holding up and confidence is returning. During the GFC, a lot of young people returned to the nest, creating ‘doubled-up’ households.

In 1985, only11 percent of 25-34 year olds lived with their parents. In 2010, that percentage had almost doubled to 21.6 percent.

I remember being 25 and I remember being 30. I guarantee you this is about economic necessity, not choice.

So as America’s economic fortunes continue to improve, and as young people feel more and more financially secure, they’ll be super-keen to head out on their own. They’ll be eager to form a household of their own.

Between 2008 and 2011, America added an average 650,000 households a year. In the year to September 2012, that had spiked to 1.2 million households.

This translates into a huge pick up in demand. And with supply still constrained, that will quickly translate into an increase in prices.

These are the fundamentals that are pulling the big money to the table.

…and with that momentum, remember you can’t pick bottom. Well at least I can’t.

But, I’m not silly enough not to recognise momentum and we now have it in the USA market.

You can sit on the side-lines and watch, be a spectator and miss yet another opportunity or you can get on your bike and pedal like crazy…

I know what I will be doing.

What will you do?

There is also a yield play, and an exchange rate play for Aussie investors, but more about that another time…

WARNING! STOP! Don't Lock-In Your Interest Rates Until…

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Hey, if you're thinking of locking-in interest rates… STOP right now!

I have some highly valuable and time sensitive information that could save you thousands of dollars.

Here is why…

The next major move in interest rates will be down, but it will have nothing to do with the RBA.

What?

Have we started outsourcing Monetary Policy to the Reserve Bank of India or something?

No, nothing like that. You'd never believe it, but the banks are set to start bringing rates down – all by themselves!

Following my blog a few weeks ago, the banks have realised that they have a social and economic responsibility to tow the line and stop gauging their customers for all their worth.

Ha ha ha ha ha ha.

No seriously. The banks can change their logos but they can't change their spots. So what's going on?

Earlier in the month, Westpac went out on it's own and cut its 3-year fixed mortgage rate to just 4.99 percent. RAMS quickly followed suit.

Now it seems that this rush of go-it-alone craziness has spread to variable mortgage rates, with Sydney-based BMC Mortgage Corporation knocking 10 basis points of its variable home loan rate to just 5.53 percent.

My tip is that this is just the thin end of the wedge, and over the next few months we'll see a lot more independent action on interest rates as the banks jostle to maintain market share.

This will give the RBA a chance to take a break, and let the banking sector take a turn at pumping up the economy a little.

Hit the showers Glenn. Take a break mate, you've earnt it.

So if it's not some new-found sense of social responsibility, what's the deal?

The truth is, that right now, banks are making massive profits on mortgage lending.

I mean, EXTRA massive profits.

Why? Because their wholesale funding costs have come right off in the past six months.

Banks have two sources for the money they lend out in the form of mortgages. First, there's deposits, where they pay you and me to make money off our money. Second, there are wholesale funding sources, where they borrow money on international capital markets, and lend it out as mortgages on a higher rate.

Following the GFC, the international capital markets took a hammering. Liquidity dried up and the price of money spiked.

This graph here wraps it up. Its shows the cost of wholesale funds, measured as the margin on the bank-bill swap rate (like the cash rate for international markets). Before the GFC, the margin on a 5 year loan was just 17 basis points.

marginal_funding_costs

However, the real thing to note that is that in the past six months, it has come right off, coming back down to 109 basis points. It's nowhere near the pre-GFC lows, but it's a lot better than it was.

This has meant that funding has become a lot cheaper for all the banks. The AFR recently reported that CBA raised $2bn in the US at a rate a fuller percentage point cheaper than a year ago. And as the cost of funds has been falling, the banks' margins, and therefore, their profitability, have been improving.

And this is even before all the rate-gauging that's gone over the past year or so. Since the official rate-cutting cycle began in November 2011, the RBA has cut rates by 175 basis points. The majors have, on average, knocked just 136 basis points of the Standard Variable Rate, pocketing 39 basis points for themselves.

As a result, the banks are again enjoying record profits.

In fact, the profit margin on mortgages is the best it's been in ten years. This graph here, prepared by UBS and published in The Australian, paints a pretty clear picture.

bank_profits

Mortgages are incredibly profitable right now. Banks are now earning a massive 88 points on every new mortgage, equal to about $80,000 over the course of an average loan.

On the back of this, CBA, posted a record $3.78 bn half year profit this month. They're literally rolling in it. And as Australia's biggest mortgage lender, with a full 25 percent of the mortgage market, CBA enjoyed a very satisfying 13 percent profit growth in retail lending.

ANZ, NAB, Bendigo and Adelaide Bank have also reported wider profit margins from consumer lending in their half-year results.

I can hear the bottles of bubbly popping from here…

So with the banks making record profits of mortgage lending, why would any of them cut rates and rock the boat?

It's true that there's a strong incentive not to. The banking industry enjoys a competitive reputation, but it's a pretty cosy oligopoly if you ask me. The rules are geared heavily in favour of the majors, and the minors do what they can.

But with mortgage volumes still in the early stages of recovery, there will be a strong incentive for both the major and minor banks to sacrifice a bit of short-term margin, for a bit of long-term market-share.

There's an uneasy truce right now. But I reckon we'll see more and more smaller mortgage lenders like BMC cut rates on their own. Then one of the regional banks will get nervous and pull the trigger, and once they move, everyone will be forced to follow.

With the majority of customers still doing all their banking with a single institution, market share in the mortgage market accounts for a lot.

And so over the next few months, I expect we'll see rates come down a significant amount, and it will have nothing to do with the RBA.

And remember that the RBA still sees the risks weighted to the downside, so the ABA's claim that if banks cut rates independently, the RBA would just raise them back to where they were, is ridiculous.

Speaking of which, is anyone else enjoying the on-going spat between the Chamber of Commerce and Industry and the Banking Association?

ACCI CEO, Peter “and the wolf” Andersen came out on the offensive again last week, labelling the banks rate gauging as nothing less than “highway robbery.” ABA chief, Steven “evil Baron Von” Münchenberg, hit back saying “ACCI's call is based on both false claims and a profound lack of understanding of how monetary policy works.”

It's entertaining theatre, but the ABA must know that the game is up. When you've got politicians, mums and dads, and the entire Australian business community lining up to sink the boot in, something's got to give.

And about time too, I say.

So, when you see the newspaper headlines “RBA Unlikely To Cut Further”… it doesn't mean that the cost of money will stay where it is….

The greed of billion dollar profit thirsty bank CEO's will see to that.

Based on that, I reckon the “cost of money” is going down, down, down…like the prices at Safeway or was that Coles…? (Hmmm…so much for multi million dollar media campaigns.)

Anyway…Great times ahead for savvy, smart and in-the-know investor like you.

Go for it!

Six properties in 18 months with passive income

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Emma is a finance manager earning big bucks. After she had a child, she had to make a decision:

“I could climb up the ranks in a corporate company and become general manager and work really bloody hard but be paid really good money, but that’s not really the avenue I wanted to go after I had a child”

She wanted more freedom, and figured she’d better make that happen for herself or have her nose held to the grind stone forever.

She decided to replicate her income via property, purchasing six properties in 18 months and is already enjoying a passive income from her property. Within the next 4 ½ years, she plans to have replaced her entire six-figure-income.

He wants you to be rich …and he's throwing money at you!

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So I got an odd email the other day.

It said,

“Dearest trusted frond, I am writing to you because I need your urgent respond relating this mutually beneficial business. I must to deposit $1 trillion in your account…”

Yeah yeah yeah. I've heard it all before. Someone out there is just giving money away for nothing.

But then I read to the end. And what do you know, it was signed:

Ben Bernanke
US Federal Reserve

So I looked into it and guess what?

It turns out that this one is legit. I've never met this guy Ben, but right now, he is doing everything he can to make me a very rich man.

Remind me to buy him a beer one day.

[Read more…]

Bernanke backs the Aussie real estate investors …Huh?

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Hey, I know you think I'm nuts for making such an outlandish statement. After all, if you don't know who Ben Bernanke is, he's the man behind the world's largest money-printing press and he's cranking it up like crazy!

It's an out-there statement for sure… and you're unlikely to read anything like this in the mainstream media. But there is nothing mainstream about me or the money that I make as an investor.

So here me out, let's roll…

Central Banks the world over are being forced into the uncharted territory of money printing (Quantitative Easing.) Thankfully, we're a still a long way from that, but you could be sure that Glenn Stevens has got a nervous eye on how much ammo he's got left. If we did end up forced down America's money printing road, what would it mean for property? I'd argue it's win-win either way.
Like those odds?

Glenn “Let the Good Times Roll” Stevens over at the RBA let the party continue last week, leaving official rates at record lows. But is anyone else detecting a bit of a nervous twitch beneath that poker-face exterior of his?

Glenn knows he's slowly being backed into a corner. And there isn't much he can do about it.

The RBA's quarterly Statement on Monetary Policy, released towards the end of last week is an uninspiring read. Essentially, the economy is on track, with modest growth this year and the economy starting to hit its strides again sometime in 2014.

But, of course, they have to say that, don't they? If the economy wasn't on track, then that would be an admission that they've got the current interest rate settings wrong. And they're not going to do that now are they?

Personally I don't know why we pay much attention to the RBA's forecasts. Everything's always “returning to trend”. The only guide it gives you is what their thinking about interest rates is.

And in that sense, the thing that really jumps out at you is just how many uncertainties there are in the outlook – or more specifically, the lengths the RBA went to point them out.

Here is my reading between the lines…

They're giving themselves plenty of room to cut rates further if they want to. I'd say they'd be expecting their hand will be forced at least once or twice more this year (in the best case scenario!!)

Interestingly though, housing gets a big wrap this year. Quote:

“Improving conditions in the housing market are expected to continue to provide support to dwelling investment.”

I wonder on that basis if Glen will rush out and buy an investment property. Or would that be insider-trading?

Have you ever thought this… “Hey MR Economist what are you investing in right now?” just after they give you their pearls of wisdom.

I digress… Where was I? Oh yes…

So say Glenn pulls the trigger twice more this year, that would take official cash rates to 2.5 percent. Glenn would have a very nervous eye on his ammo clip. He's starting to run out of ammo.

Central Banks can't cut interest rates down past zero. Negative interest rates don't make sense (effectively paying people to borrow from you.)

But this is exactly where the US is at right now. The Fed cut rates aggressively, but didn't get the bounce in activity it needed. Interest rates fell to zero, and the Fed, under Ben Bernanke, had to get creative.

Enter stage left: The Money Printing Press… Quantitative Easing

Quantitative Easing refers to a range of creative policies that have one aim: pumping as much cash as possible into the system.

As it works right now, The Fed creates money ex nihilo (the term you want to use when you want to say “out of nothing” and still sound like you know what you're doing) and then stuffs that into the financial sector by purchasing treasury bonds and mortgage backed securities off the banks.

Once they do this, the only direction for asset values to go is up… that's what there stock market and the real estate market did… You don't have spend 4 years at uni and get an economic degree to figure this out.

So Glenn will be watching the US experiment carefully and trying to learn what he can. A few little hic-cups on the global stage, and we could end up in exactly the same boat.

I'm still taking a bullish view on the economy over the medium term. There's evidence that the wall of money is sparking things in the housing sector, which will give consumers more confidence. And government budgets here are paragon of fiscal prudence compared to the US.

But just for the fun of it, let's imagine ourselves in the worst case scenario. What does it mean for the property sector?

Interestingly, it's a win-win scenario for property.

And this is because central banks have a fixation with property. They know just how important it is to the economy. It is central to household wealth, and therefore central to consumer spending.

And so we saw with QEIII, the Fed announced that on top of Treasury Bills, it was going to pump money into Mortgage Backed Securities. This was a direct attack on the housing market. According to Big Ben Bernanke:

“Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing.”

So then, there's two possible outcomes. Either QE works.

Or it doesn't.

If it works, mortgage interest rates are driven as low as they can go, and banks encouraged by the booming markets, become eager lenders. This will feed directly into property sales and prices.

Of course a cooling economy will be having a cooling effect on the market as well. But where else are you going to put your money? The government won't be directly intervening in the stock market to puff up shares…

But in this scenario, QE works, and the property market leads the economy to recovery.

In the alternative scenario, QE does what's it's doing now in the US – not much. The economy keeps dragging along the ground, and ultimately, all this money printing translates into inflation. Investors start rushing towards assets that are “real” and give them some way to preserve purchasing power.

Even in the short term, property becomes a hedge against inflation.

But in either case, those of us who have a stake in property before the economy topples into a liquidity trap, get a good shot in the arm.

One other thing that I want to add is this: All the money-printing is sure to keep the America dollar weak and the Aussie dollar strong… So the “home run” play is this… Invest in USA real estate assets today.

Firstly, by doing this you get an amazing currency advantage right now as well as the opportunity to get a the double whammy of profits as growth slowly picks up over there.

Effectively, if you buy today and the Aussie dollar returns to 85c you would have made a 20% capital gain, even if the property has not moved a cent over there.

Add to that a 10-20% capital growth of the real estate, then the compound effect of all this can return a 50% gain overall… All this could happen in the next 12-24 months.
But wait, there's more… You get great holding cashflow of any where between 10 to 15%… How good is that?

Do you now see why I made the crazy statement, “Bernanke backs Aussie real estate investors…”

Not so crazy now, is it?

Look I'm no fool, granted, these are uncertain economic times, but even amidst changing economic paradigms, property is as safe a bet as it's always been right now.

Stay invested and start adding to your real estate portfolio… Today.

China farts and Australia craps its daks!

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Hey, you and me need to discuss this. Your wealth and your children’s wealth depends on it whether we like or not.

Have you seen the movie, Looper?

It’s a movie about time travel 50 years from now. One of the main characters travels back from the future to tell his younger self to learn Chinese, it’s the language of the future.

Whilst I reckon it would be handy, I’m not doing it. But I am watching closely as to what is going on in the Far East (or North from our perspective), so lets move on…

Remember this…. ‘America sneezes and Australia catches a cold’?

Now it’s more like, ‘China farts and Australia craps its daks!’

That’s exactly what happened last year. It looked for a while like China’s growth might fall below 7 percent. That’s not a bad rate of growth. But if you’re trying to pull a billion people out of poverty within a generation, it’s not enough.

And it’s not enough to support China’s monstrous demand for commodities. The World Bank estimates that China currently consumes 45 percent of all metals produced globally.

So if one country is consuming almost half of the global metals market, even the slightest tremor is going to send shockwaves across the world.

And with the resources sector almost single-handedly propping up the Australian economy, it caused a bit of panic here. “The boom is over! The sky is falling!”

The RBA cut rates twice in quick succession, just to cover our assets.

In the end, China got back on track, and all the data so far this year are helping mining executives across the country sleep a little better.

So what happened?

Basically, China was trying to pull off an incredibly tricky acrobatic rebalancing act. They just didn’t quite nail the landing.

During the GFC, China cuts rates aggressively to try and insulate itself from the fall-out. In concert with sustained government spending, the rate cuts worked, and the Chinese economy crashed through the worst of it.

Trouble was, interest rates got stuck on a high-speed setting. And with interest rates at bargain basement levels, money started gushing towards the property sector. The Chinese leadership started to worry about an emerging blossoming bubble in real estate.

(Sound familiar? This is just what some people are worrying is happening right here right now in Australia. )

And so Beijing started looking for ways to take some heat out of the economy – to rebalance growth away from the property bubbles, exports and infrastructure investment, and towards private investment and consumption. Their strategy was to let the economy cool down a little. To bring growth back down to around 7 percent, from decade averages of over 8 percent.

The Chinese leadership went out and let it be known that they’d be happy with these more “balanced” rates of growth. In the words of Vice-Premier Li Keqiang:

“It is hard to maintain double-digit growth, but 7 percent will be enough to achieve an affluent society by 2020. We have benefited from reform in the past 30 years… We have to march on as there is no way back.”

The Chinese government still cut interest rates and banks’ reserve requirement ratio twice last year. But given what was playing out on the international stage, this was seen as conservative.

However, in the third quarter of last year, a string of soft data releases gave rise to the fear that China had undershot the mark, and was running dangerously close to stalling.

Hit the panic button.

But China was never going to let it happen.

Can you imagine how hard it must be administering a nation of 1.3 billion people? It makes what’s goes on in Canberra look like the squabbles of an outer-suburban council.

And can you imagine what an angry mob of 1.3 billion looks like. It’s a scary thought. There’s some very strong incentives to make sure the climb out of poverty continues. And quickly too.

But China has one big thing going for it – it’s stage of development.

China is around where Japan and Taiwan found themselves about 50 years ago. There’s has been an incredibly rapid pace of urbanisation over the past 20 years in China, but still 53 percent of the Chinese population live in rural areas.

And there are estimates that moving every 200 million farmers to urban areas boosts GDP by 0.8 percentage points. That gives the Chinese a powerful lever to lean on.

Similarly with investment. In a transition economy like China’s, it is easy to find productive areas to invest in – areas that expand productive capacity in the long run.

And so China knows that if it needs government spending to give GDP a boost, it can also fall back on infrastructure investment. And it can trust that, (9 times out of 10!) it’s not building some massive white elephant.

In this way, China’s stage of development affords Chinese officials with degrees of freedom not available to more advanced economies.

And you can be sure that the incoming Chinese leadership team will be doing everything it can to keep the party going.

In November 2012, the CCP completed a sweeping transfer of power with the new General Secretary, Xi Jinping and the new Prime Minister, Li Keqiang coming to the helm. While this transfer is not technically official until the annual session in March 2013 of China’s parliament, for all intents and purposes, this new leadership is in place.

And they will be keen to stamp their mark, and show the Chinese people that the economy is in good hands. Some forecasters are predicting that fixed-asset investments in infrastructure, including roads, bridges and housing, could surge to 20 percent this year, from 16 percent in 2012.

China will need to follow the classic development model at some point – moving away from a reliance on investment and exports, to a greater contribution from domestic consumption. But in the mean time, over the next ten years at least, China can rely on massive investment to drive things along.

A recent Fitch Ratings report shows investment (both public and private) reached a new record of 45.6 percent of GDP in 2011. No country in history has known anything like it – not even Japan, Taiwan or South Korea.

This obviously has very bullish implications for Australia and the Australian resources sector.

There will be ebbs and flows in demand for commodities, but there will be a fundamental level of unshakable demand.

The bottom line…

With the world awash with money thanks to the central banks and the China phenomenon, this year is a great year to build wealth and accumulate assets like crazy.

Well, that’s what I’m doing right now…

What about you?

Interest-Rate Shock Horror!

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Sorry to be so dramatic…but I had to get your get your attention somehow.

The RBA left rates on hold this week. No surprises there. Glenn “Let the good times roll” Stevens seems happy to leave rates at record lows and to keep pumping gallons of cash into the economy.

But because there was no change, some esteemed economists think that the next move is up instead of down… Shock horror.

I'm all for a balanced view, so let's look into it…

Paul Bloxham, Chief Boffin at HSBC is telling anyone who'll listen that the next move in rates is up. Warrick McGibbin also reckons that rates should be going higher. In fact, he thinks the both of the rates cuts at the end of last year were a mistake.

Geez, who invited those guys?

The truth is, their logic is probably sound. But it's never going to happen.

Let me tell you why.

But first, who is this Warrick McGibbin character? I don't blame you if you never heard of him. He's an academic economist after all. But for quite a few years he was sitting on the RBA board, helping chart the course of monetary policy. Now that he's left, he's a bit freer to wax lyrical on interest rates. This is what he told the AFR:
“Barring any disasters out of the US and Europe, the RBA's easing cycle should be over…It will become increasingly important for the RBA to normalise what are extraordinarily stimulatory interest rates given the striking asset price inflation we are now seeing coupled with the economy's nominal growth. I would not rule out two hikes before the year is out…”
Take it easy, tiger.

McGibbin might have a bullish view of the market, but he's a notorious policy hawk. (Just a note for those of you new to Central Bank bird watching – a hawk is someone who's happy to sacrifice a bit of growth to keep a tight lid on inflation. A dove, on the other hand, is happy to let inflation run a little if it means better growth outcomes.) McGibbin is a hawk and probably argued against every rate cut that happened on his watch.

The thing that jumps out at me from that quote is the bit about “striking asset price inflation”. What's he talking about? Shares are doing ok these days but it's nothing to write home about. It can only mean one thing.

Property.

McGibbin has been around long enough to know that rates this low, that these “extraordinarily stimulatory interest rates,” are going to have a big impact on property prices. The last time rates came down to these “emergency levels” property prices grew 20 percent in a year!

And it's already started. Prices are already on the march. House price data across the board are showing that things started ramping up late last year. And it's just the beginning.

But hang on a second, aren't increasing property prices a good thing? Haven't we been hanging on every data release through 2012, waiting to see when the recovery would finally kick off and we could finally crack that bottle of bubbly?

We have. A healthy property market and rising property prices are a good thing – especially for property investors like you and me.

But that's not what's got McGibbin worried. Nor anyone at the RBA.

To use the RBA's term, what McGibbin and the hawks are worried about are “imbalances” in asset markets. But let's call a spade a spade. Their worried about bubbles.

And it's not the rising prices that make bubbles so scary. The danger is the way inexperienced punters can end up leveraging themselves into a corner. They take on more debt than they can handle, and sink it into poor investments. These poor investments do ok when the market is on the way up, but are the first to hit the floor when the music stops.

And what the hawks are arguing is that the current interest rate setting is driving people into the property market.

Well, of course they are. With mortgage rates at record lows, and pretty ordinary returns to be had anywhere else, property is the only game in town.

But is it a bubble?

Of course not. Prices are just picking themselves up off the floor in most of the capitals. Things are definitely on the up, but it's been a slow couple of years.

So what McGibbin is really saying is that he's worried that, at some point down the track, we might be stuck with a bubble.

I think it's probably too early to tell either way. He might be right. And it might be making ‘Good Times Glenn' over at the RBA a bit nervous too. And it might be, that if you had a magic crystal ball that could tell you such things, it would tell you that interest rates actually do need to go up this year to stop it happening.

But that still won't change a thing. Interest rates are going nowhere
Why?

Because the RBA isn't in the business of bursting bubbles.

The RBA, like most central banks these days, is an inflation-targeting central bank. That is, they have an agreement with the government. They said, you let us control the interest rates, and we'll use them to keep inflation under control. We'll leave everything else to you.

So the only excuse they've got for raising rates is if it looks like inflation might be getting out of hand.

And what's inflation doing?

Nothing. It's going nowhere. It's right at the bottom of the RBA's target band and going nowhere fast.

So if the RBA was worried about this “asset price inflation”, they'd have to make the argument that ….
1. There was a bubble,
2. That the bubble was about to burst, and…
3. When it bursts it's going to take the economy down with it and drive inflation through the floor.

That's a pretty big call to make.

And could you imagine just how much of it would hit the fan if Glenn came out and said, “Hey, we're jacking up rates and adding 300 bucks to your mortgage. Why? Because we think your homes are worth too much.”

Forget it. He'd be torn to pieces. And once the dust settled, he'd be lucky to still have a job guiding tours around the currency museum.

Rates aren't going anywhere.

It is true that current settings will have a big impact on house prices, and quickly too.

But until there's solid evidence that inflation is on the move, it's time to accumulate and get rich – or in your case, richer… Much, much, richer.

So right now you can slip under the radar and start picking up deals that yesterday (last year) had negative cashflow and today are positive… Make sense?

While Glen keeps busy “like a hawk” watching the inflation numbers, retail spending, unemployment, commodity prices, new start home figures, the Australian dollar, etc, etc…

(By the way all, of which determine if interest prices go up or not…)

…You can take advantage of the all this cheap money on offer and become rich before every one else wake ups.

Come on now, get busy, get to work, take action and make it happen…this year.

Warning: Wall of Money to Smash the Real Estate Market… Look Out!

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Despite what the RBA did yesterday (which was nothing), there is already a tidal wave of money heading in the direction of Australian property. The bells are ringing and all the indicators are already pointing north, but you aint seen nothing yet…

I don’t think most people really understand just what’s in store for Australian property this year. Sure, every analyst worth their salt is pointing to a strong year, and all the data are already telling us that house prices are on the move. But that’s not even the half of it.

I think what everyone is underestimating is just how much fire is going to come off the current setting of interest rates. And forget what the RBA does today – that won’t change what’s already in store for us.

Look at where rates currently are. The official cash-rate is just 3.0 percent. That’s a record low. You can get amazing deals out of the banks right now, especially if you push them.

But the really important thing to remember is just how quickly rates have come down. The RBA has knocked 175 basis points off the cash rate in a little over a year. At that rate, you’d think they were selling Persian Rugs or something.

And so this stimulus is taking its time to work it’s way into the system. The housing market has turned the corner and all the data are pointing up, but this is barely a taste of things to come.

We’ve got houses on one side of a see-saw, and interest rates, like some oversized King Kong about to come smashing down on the other. Once they land, watch house values go stratospheric.

…but be warned not all areas will go up…some will go up faster than others…much, much faster. Your job if you are willing to accept it, is put your ear to the ground and track the stampede of money and buyer.

One thing is for sure, by taking action now you will be ahead of the pack.

House Prices Already on the March

As I said, we’re already seen the first signs of what’s in store. House prices are clearly on the move, and gathering steam.

One of the tricky things about the property game is that every man and his dog’s got a house price index. When everyone’s pushing a different view, it can be tricky to get a clear reading on what’s actually going on.

But the interesting thing about what’s going on right now is that the housing data have joined hands in a sweet, sweet harmony, and for the first time in a while are painting a consistent picture: house prices are up….that means some easy money is on offer.

Let’s start with Australian Property Monitors. They’re reporting that national house prices grew 2.1 percent in 2012, accelerating towards the end of the year, and growing a very impressive 1.9 percent in the December quarter. To put that in perspective, that’s a annualised growth rate of a little less than 8 percent a year. That’s a decent clip, and as I said, we’re just getting started.

Now just to drive this home, if you put in a 10 % deposit an you get an 8% return – that’s a huge 75% cash-on-cash return…try getting that in another form of investing in 2013…

And what’s more, the national figures hide some very strong performances by Perth, which grew 6.1 percent in the 2012, and Sydney, which was up 3.4 percent. Both cities have a full head of steam behind them. Only Melbourne seems confused about which direction it should be running.

Looking at some of the other datasets, which use different methodologies, the Residex measure was up 0.53 percent in the month of December, which is an annualised growth rate of 6.5 percent a year.

Residex Chief Economist Jon Edwards (nerdy looking guy, but super sharp) said it’s the best performance in 18 months.

To top it off, the RP Data-Rismark measure was up 1.1 percent in January. That’s an annualised clip of 14 percent a year. Any investor would be happy with that.

Hey, what I have quoted above are “averages.” If you add a little real estate education, you could get 300% better return that the averages.

There is also a solid recovery underway in new home sales. It seemed that investors and existing homes were supporting the market through most of 2012. However, the Housing Industry Association Land Sales Report showed that residential land values increased 3.8 percent in the year to the September quarter. Not bad at all. And I think we’ll see an even better result once the December quarter data come in.

The HIA measure of new home sales also bounced in December. They were up 6.2 percent in the month, and 3.3 percent in the quarter. This shows that the housing market is building a solid and broad base from which to launch its current run.

Aint Seen Nothing Yet…

The current recovery is exciting, and some of these numbers will get investors’ mouths watering, but it’s just the thin end of the wedge.

What we’re seeing is the vanguard of a price surge brought on by the slashing of interest rates over the past year or so. And we’re just getting started.

The RBA started slashing rates in November 2011, and has since knocked 175 basis points off the official cash rate. As you’d expect this is starting to have a big impact on property demand, and therefore prices.

The only thing that’s surprising is that it’s taken so long to get here. If you take the last three rate cutting cycles (1996, 2001, 2008) as a guide, you’d normally expect house prices to be up between 15 and 20 percent this far into a rate cutting run.

But we’re only just starting to see the stimulus come through now.

Why’s that?

I think it’s got everything to do with confidence.

The GFC really rattled people. It gave us a sense of how vulnerable we were to the dramas playing out in the rest of the world. And with our eyes fixed overseas, we saw Europe take itself to the brink of disintegration, and America almost drove itself broke.

At the moment, it’s all very quiet on the western fronts…

But those troubles seem to be behind us now, and we’re slowly seeing a pick-up in Aussie confidence.

And that means house-prices have some catch up to do. The rough maths suggests that they’re at least 15 percent behind the curve.

My bet is they’re going to make this ground up very quickly, and from there, just keep heading skywards.

Play your cards right and this tidal wave of money will really float your bank account much, much higher this year.

So the plan is really simple, in every cycle there is a time when there is a lot of easy money on the table…this is one of those times.

Time to accumulate and ride the wave of money coming out of hibernation. It already hit the stock market over the last 3 months…and look what has happened there, market is up about 12% …now it will move to real estate…

Signed with Success,

Jon Giaan
Knowledge Source

P.S. Be warned, not all areas will go up. It’s dumb and foolish to think that. I’ve got my eyes on 3 or 4 areas that I am running the numbers on at the moment… I’ll fill you in shortly.